Microsoft buys Facebook slice

Microsoft is paying top dollar to outbid its chief rival for a key piece of online-advertising real estate: leading social-networking site Facebook.

In a deal that's reminding some people of the late 1990s dot-com bubble, Microsoft will pay $240 million for 1.6 percent of Palo Alto, Calif.-based Facebook, the companies said Wednesday. That implies the three-year-old, privately held company, which has yet to turn a profit, is worth $15 billion.

Microsoft beat out at least one other suitor — widely reported to be archrival Google — to become the exclusive, global provider of banner advertising sales on Facebook until 2011. In August 2006, Facebook selected Microsoft to provide advertising just in the United States.

At that time, the site had 9 million users at universities, businesses and high schools around the world. Today, Facebook boasts almost 50 million users, some 60 percent of whom are outside the U.S.

"This deal represents a major advertising syndication win for Microsoft, and I think this signals an enormous vote of confidence from our largest advertising partner," said Kevin Johnson, president of Microsoft's Platforms and Services Division.

Microsoft is building and acquiring technologies and expertise to challenge Google for a pot of online advertising revenue that Johnson pegged at $40 billion and growing. Earlier this year, it paid $6 billion for Seattle digital-advertising shop aQuantive, which came with technology to better serve and track online advertisements.

"Facebook is one of the premium properties online today from a social-networking standpoint," said Sid Parakh, a technology analyst with McAdams Wright Ragen. "It certainly is valuable. You can debate whether it's worth $15 billion or worth $5 [billion], but there is value to being able to place ads on there and then grow as they grow."

More than just an expanding stream of online-advertising revenue, the Facebook deal represents a chance for Microsoft to tightly bind itself and its technology to the en vogue world of social networking.

"Clearly they are buying ad revenue, and that's of some significance, but I think this is much more about Microsoft positioning themselves at the foundation of ad platforms for social networks," said Andrew Frank, an analyst with Gartner.

Social networks, including Facebook, MySpace, Bebo, Google's Orkut and many more, have skyrocketed in popularity. People spend hours building and updating personal Web pages with photos, videos, links. They stay in touch with friends, classmates and co-workers by visiting pages, which include all manner of add-on Web applications for sharing musical tastes, sending instant messages and virtually anything else.

Advertisers are taking notice. They will spend $1.2 billion to advertise on social networks this year, according to research from eMarketer.

Still, there is some skepticism about social networks as an advertising medium, and as the amount spent on it grows, advertisers will up their scrutiny.

"2007 will be the year when marketers will demand results," wrote Debra Aho Williamson, senior analyst with eMarketer, in a May report on the future of social-network marketing.

Even Microsoft Chief Executive Steve Ballmer has suggested recently that social networks are something of a fad. He also was dismissive of Facebook's technology.

"There can't be any more deep technology in Facebook than what dozens of people could write in a couple of years. That's for sure," Ballmer said in an interview with the London-based Times Online published Oct. 2.

Johnson said Microsoft's broader deal with Facebook will allow the companies to work on advertising unique to social networks that will improve the medium to advertisers.

Johnson and Owen Van Natta, Facebook's vice president of operations and chief revenue officer, shied away from specifics on how the companies will or won't mingle their technology.

But there are plenty of examples of the companies working together already, and analysts see several other possibilities.

A new Microsoft tool for making hybrid Web applications allows those programs to be published directly to Facebook pages. Facebook supports Microsoft's new Web video platform, Silverlight, which competes with Adobe Flash. And Microsoft and Facebook have worked on other tools for software developers.

Matt Rosoff, an analyst with Directions on Microsoft, said the two companies have complementary approaches to the Web. Microsoft is building its own technologies, such as mapping and advertising systems, and letting third-parties use them. Facebook, on the other hand, invites developers to build applications and provides a venue for distribution to its users.

Rosoff said the two companies could come up with some interesting combinations, such as distributing Windows Live online services through Facebook.

But do those possibilities justify the price Microsoft is paying for a slice of Facebook, and the implied $15 billion valuation?

"To me that looks an awful lot like dot-com valuations," Rosoff said.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com